Is AOL Only Worth $12.25 Billion?

Here is some undoubtedly errant math from a former AOLer (me):
In December 2005, Google purchased 5% of AOL for just over $1 billion, pegging its market value of about $21 billion. The Washington Post ran this article today:

Murdoch and AOL Join Fight Over AOL

So, from the numbers in the article (notably all based on hear-say and conjecture), I did some back-of-the-envelope math:
Supposing first that Yahoo’s contention that the Microsoft offer of $42 billion undervalues them, let’s give them a 7% markup, bringing their current value to about $45 billion. From the article:

“Under the terms of the possible Time Warner deal, the AOL unit would become part of Yahoo. In exchange for AOL and an undisclosed sum, Time Warner would receive a 20 percent stake in the enlarged company, said the source, who cautioned that the terms were not final and that the deal could founder.”

I’m going to ignore the “and an undisclosed sum” to make my fuzzy math easier. Assuming the 80% of the new venture that Yahoo would keep reflects their current $45 billion value, then the resulting entity would be valued at about $56.25 billion. So, Time Warner’s 20% would be worth about $11.25 billion.
Now, that probably does not reflect the full current value of AOL. Earlier in the article it states:

“Yahoo, meanwhile, is working out a complicated deal to acquire most of AOL from Time Warner, the world’s second-largest media company…”

I’m guessing the part they won’t buy is the AOL access (i.e., dial up) business. It’s not news that Time Warner is seeking a buyer for that already, but I haven’t seen any guesstimates of what the selling price would be if they can find a buyer. So, I’m going to pull a sale price out of my elbow (see – clean language Mom!) and say they could sell it for $1 billion. That would give AOL a current market value of $12.25 billion (under the deal outlined in the Post).
So, loads of fuzzy math aside, that means since the Google purchase in 2005, the value of AOL has dropped 40%. Let’s compare that to the TWX stock price. On December 21, 2005 (the day after the Google purchase was announced), the TWX closing share price was $15.58. Yesterday it closed at $14.43 – a drop of 7%. If what Google paid in 2005 was just, and the AOL value tracks with TWX overall (a great simplification), then AOL’s current value would be about $19.5 billion.
So, if all the fuzzy math and conjectured prices in today’s article are correct, one (or more) of three things is true:

1. Google paid too much for its 5% stake in 2005, and/or
2. The other Time Warner divisions have compensated for the 40% drop in AOL’s value such that TWX overall value only dropped 7%, and/or
3. The deal speculated in today’s Post undervalues AOL by about $7 billion

Given the conjecture in the post article, “In the unlikely event that both deals close, News Corp. and Microsoft would control Yahoo, MSN, MySpace and AOL…” and the fact that Google can decide to sell (or keep) its 5% of AOL this July, 2008 is going to be a very interesting year for AOL.